Will Beijing and Washington break global supply chains
Western analysts are concerned about China's new ambitious economic plans. Is the Celestial Empire preparing for the next Big Leap, said Doctor of Law, Honored Lawyer of Russia, Professor Yuri Zhdanov.
– The occasion was the regular annual sessions of the Legislative Body of China and the National People's Congress (NPC). Premier Li Qiang's speech gives an objective picture of the state of affairs in the country. Well, Western analysts are studying this picture from their own perspective.
Thus, The Economist experts in the article “Critical time for Xi Jinping at China’s annual political meeting” propose to pay attention to three points: China’s efforts to stop the economic imbalance , evidence of the success of Xi Jinping's long-term economic program and signs of the balance of power within the leadership team.
But at the same time, the authors claim that both meetings are taking place against the backdrop of alarming economic news.
– This is what The Economist says: “New data shows factory production contracted in February. Deflation took hold, with consumer and producer prices falling 0.8% and 2.5%, respectively, in January compared with a year earlier. Real estate prices are falling every month. The stock market has risen slightly in recent weeks following government intervention to stem the decline, but it is still worth $4 trillion less than at its peak.
– Definitely. According to Bloomberg, independent experts forecast economic growth this year at 4% to 5.2%, with an average of 4.6%.
And Bank of America's Helen Qiao expects this year's deficit target to be 3.5% of GDP. In addition, the central government will issue 1 trillion yuan ($140 billion) of “special bonds” to finance the spending. Morgan Stanley's Robin Xing says China's broad budget deficit will need to widen by at least 1.5% of GDP this year to curb deflation. He expects the government to set fiscal expansion closer to 0.5% of GDP in the two sessions. The rest should arrive later this year, once the government realizes it has no choice but to respond to inadequate demand.
According to Qiao, Xi Jinping is concerned about the negative consequences of the stimulus, such as increasing debt and wasteful investment. In an alternative scenario, China could set its growth target at 4.5%, keep its deficit at 3%, and make no mention of special bond issues. This scenario would be a “moment of reckoning” for investors: “It will demonstrate that even in the face of bad economic news, China is not ready to revive the economy as many fund managers and businessmen would like.”
< p>– I suppose it’s both. Analysts acknowledge that several successive campaigns have already been launched over the past decade, including “Made in China 2025” (innovative industrial policy), “shared prosperity” (limiting excessive corporate power) and “dual circulation” (self-reliance). China's leadership has placed an emphasis on increasing productivity and developing higher value-added industries such as climate technology, life sciences and, inevitably, artificial intelligence.
The slogan “new productive forces” was put forward as an innovation in Marxist theory, and not as the unleashing of markets. And while China says it wants to restore relations with private business, other policy changes point to tightening government control over the economy. Thus, on February 27, the government tightened rules regarding “official secrets” as part of its new “comprehensive national security” doctrine. Experts fear that this will further expand oversight of businesses. Around the same time, restrictions were placed on quantitative trading funds, which use computers to trade and are ubiquitous outside China.
“They are concerned about trade relations between China and the United States. Thus, in another article by The Economist experts, “How Trump and Biden failed to break ties with China,” it is noted: “Donald Trump and Joe Biden do not agree on much, but they hold similar views when it comes to America’s trade relations with China. They believe that the world's largest economy is too dependent on the world's second largest economy. American officials travel the world touting the benefits of “friendship”—or moving production out of China to less risky markets. Business leaders are making positive noises and are genuinely concerned about China's weak economic growth, not to mention its unstable politics. The number of comments on earnings calls regarding «reshoring» has increased sharply.»
Last year, The Economist argued that much of the supposed division between America and China is in fact illusory. Take a closer look, the experts wrote, and you will understand that “the economic relations between the two countries remain strong, even if this fact is masked by tricks on both sides. The economies of America and China are not falling apart. Indeed, some changes in supply chains could further link the two countries.”
“It’s precisely a complete rupture that the Americans fear.” Last year, Mexico overtook China as America's largest source of imports. According to American data, since 2017, the share of American imports from China has fallen by a third, to about 14%. Some of that decline occurred after Trump imposed high tariffs in 2018. The other part reflects growing concerns about China's territorial ambitions: if China invades Taiwan, many Asian supply chains will become unusable. Biden largely kept Trump's tariffs in place. However, China reports that its exports to America grew by $30 billion between 2020 and 2023, while America says imports from China fell by $100 billion.
Other data provide further reasons for skepticism about the separation. Input-output tables published by the Asian Development Bank show the share of Chinese economic activity that can be traced to other countries. Looking at 35 industries, experts estimate that in 2017, the Chinese private sector contributed an average of 0.41% of the contribution of US firms. That may not sound like much, but it beats the 0.38% that came in Germany and the 0.24% in Japan. By 2022, China's share had more than doubled to 1.06%, a larger proportional increase than Germany or Japan.
– So Western experts are trying to understand this trend: “America’s attempts to create a clean energy infrastructure may be one of the factors that will make the import of Chinese electrical equipment much more important. US service firms also appear to be increasingly reliant on Chinese-owned intellectual property.
— Of course. China's leaders have no intention of abandoning their country's role in global supply chains. In December, the Central Economic Work Conference, China's agenda-setting economic council, made expanding trade in intermediate products (which are used to make finished goods) a priority. State-owned banks are redirecting loans from real estate to manufacturing, raising the possibility of a glut in Chinese exports. And many of China's new industrial titans are well positioned to benefit from this strategy.
“Perhaps this is even the beginning of the Great Leap.” Indeed, the growth of these types of companies is already having an impact. Western experts estimate that since 2019, China's global exports of intermediate goods have grown by 32%, compared with growth of only 2% for other types of exports, such as finished goods. This surge is driven by exports to countries such as India and Vietnam, which are two of the US government's preferred trading partners. American trade with these countries, in turn, is growing, from 4.1% of goods imports in 2017 to 6.4% today. Taken together, these trends mean that the two countries often act as sort of packaging hubs for goods made with Chinese raw materials and destined for the United States. Southeast Asia's up-and-coming industries are increasingly playing a middleman role, matching Chinese production with American demand.
Chinese supply chains may be less visible, but they remain critically important to the American economy.
– Yes, such fees may be enough to prompt some companies to leave China permanently. Again, a forceful option on the Chinese side for resolving the “Taiwan issue” could have similar consequences.
But Western experts hope that “in the absence of radical shifts in American or Chinese policy, one should not expect that in the near future something will change. Many countries are more than happy to play both sides: receiving Chinese investment and intermediate goods, as well as exporting finished goods to America.
The economic efficiency provided by China's enormous scale and manufacturing expertise is a powerful force in favor of the status quo. Disunity may be strong rhetoric, but it’s not quite the same.”
– How confusing! Moreover, the Chinese are creating their own cryptocurrency, strictly tied to the yuan.
Project Syndicate experts in the article “A pilot stablecoin project in China?” write: “Hong Kong is well suited for financial pilot projects due to its reputable monetary and regulatory authorities, as well as an open, market-oriented and globally connected institutional environment. One such scheme could involve creating a stablecoin pegged to the offshore yuan for use in China's Greater Bay Area. The Hong Kong Monetary Authority (HKMA), Financial Services and Treasury Board (FSTB) are working to establish a regulatory regime for stablecoin issuers in the territory as soon as possible. Asset managers and fintech companies are reportedly watching these efforts very closely. Other governments should also do the same. “Collateralized” stablecoins are backed by a pool of reserve assets, be they fiat currencies, other crypto assets, or commodities. But not all stablecoins are backed by reserve assets: unbacked stablecoins seek to maintain a stable value in other ways, such as through algorithms that limit their supply, creating market value.»
— Of course not! For what? Currently, there is no generally accepted standard for stablecoins, let alone a regulatory framework governing them. But the market is huge and growing quickly.
Project Syndicate writes: “Since the beginning of 2020, the estimated total market value of stablecoins has soared from $5.9 billion to approximately $130 billion. US dollar-pegged stablecoins dominate the market thanks to the US dollar's sustained global dominance as a means of payment, a store of value, and a unit of account. , as well as the liquidity and convenience of the US dollar asset market.»
– The goal of stablecoins is to offer a more reliable alternative to cryptocurrencies such as Bitcoin, which are not tied to anything and have proven to be very unstable. Collateralized stablecoins are “generally less volatile than traditional crypto assets,” according to the Bank for International Settlements. At the same time, “neither of them was able to consistently maintain parity with their peg.”
Moreover, BIS notes that “there is currently no guarantee that stablecoin issuers will be able to redeem users’ stablecoins in full and on demand.” Ultimately, none of the more than 200 stablecoins in circulation today meet “the key criteria of being a safe store of value and a trustworthy means of payment in the real economy.”
In general, this — so far just an experiment in the financial market, testing the demand for a new product.
— Considerable. Project Syndicate identifies four conditions for the success of the stablecoin market: “First, all stablecoins must be pegged to a widely accepted legal tender or fiat currency. Secondly, they must operate within the generally accepted regulatory and licensing framework. Third, issuers must be able to innovate in areas such as distribution, market support and infrastructure. Fourth, stablecoins should be widely used in the field of decentralized finance.”